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THE PROBLEM OF THE RUPEE: ITS ORIGIN AND ITS SOLUTION

(HISTORY OF INDIAN CURRENCY & BANKING) ______________________________________________________________

__________________________

CHAPTER IV

TOWARDS A GOLD STANDARD

The establishment of stable monetary conditions was naturally enough

dependent upon the restoration of a common standard of value. Plain as was

the aim, its accomplishment was by no means an easy matter. Two ways

seemed at first to be open for carrying it out in practice. One was to adopt a

common metal as currency, and since all important countries of the world had

gone over to the gold standard it meant the silver-standard countries should

abandon their standard in favour of gold. The other was to let the gold andsilver standard countries keep to their currencies and to establish between

them a fixed ratio of exchange so as to make the two metals into a common

standard of value.

The history of the agitation for the reform of the Indian currency is a history

of these two movements. The movement for the introduction of a gold

standard was, however, the first to occupy the field. The failure of the

notification of 1868 may be said to have marked the failure of a policy, but the

movement for a gold currency in India started in the sixties was not altogether

stamped out of the country. That the movement still had life in it is shown by

the fact that it was revived four years later by Sir R. Temple, when he became

the Finance Minister of India, in a memorandum dated May 15, 1872. The

important particular in which he differed from his predecessors consisted in

the fact that while they all aimed to make the British sovereign the principal

unit of the gold currency in India, he desired to give that place to the Indian

gold coin, the " mohur." Why his predecessors did not do the same when the

problem of correctly rating the sovereign was said to have baffled them so

much is a little surprising when it is recalled that the Indian Mints had been

since long past issuing the "mohur", which, as it was possible to rate it

correctly, could as well have been made the principal unit of the gold currencyin India. That they did not can only be explained on the assumption that they

were anxious to kill two birds with one stone. The adoption of the sovereign,

besides supporting a gold currency in India, was also calculated to promote

the movement of international uniformity of coinage then in vogue. The utility

of the " mohur " was in this respect comparatively inferior to that of the

sovereign. But when Sir Richard Temple came upon the scene the prospect



Government to receive and coin it, being repealed; the Government

retaining in their own hands the power of replenishing the silver currency

whenever they may deem it expedient. That gold bullion should be received

by the Government at the mint rate of 38 rupees 14 annas per standard

ounce, and coined into sovereigns and half-sovereigns (representing 38

rupees 15 annas), or ten or five rupee-pieces of the same value, which

should be declared legal tender, but not demandable, the present silver

rupees continuing to be legal tender, as before.

At the time the Smith plan was presented, the fall of silver had made itself

felt so that a considerable support in favour of the plan was forthcoming. The

support of the trading community was embodied in the resolution, dated July

15, 1876, of the Bengal Chamber of Commerce, which urged " that it was

expedient, in view of any ultimate measures that the Government may adopt,

that Clause 19 of Act XXIII of 1870, making it obligatory on the Mints in India

to receive all silver tendered for coinage, and also Section II, Clause ( b) of ActIII of 1871, making it obligatory on the Currency Department to issue notes

against silver bullion sent in, be temporarily suspended, at the discretion of

Government, and that during each such suspension or till further notice it be

not lawful to import coined rupees from any foreign port." A similar feeling was

voiced by the Calcutta Trades Association. By this time the fall of exchange

had also commenced to tell upon the finances of the Government of India, so

much so that Sir William Muir, in his Financial Statement for 1876-77, was led

to observe —

"The sudden depreciation of silver and the consequent enhancement of

charge to the Government of India in laying down yearly the sum required in

England of about fifteen millions sterling, without doubt cast a grave shadow

on the future. In truth, it may be said that the danger, from whatever point of

view considered, is the gravest which has yet threatened the finances of

India. War, famine, and drought have often inflicted losses on the

Exchequer far greater than the charge which threatens us in the present

year. But such calamities pass away; the loss is limited: and when It has

been provided for the finances are again on sure and stable ground. This is

not the case with the present cause of anxiety. Its immediate effects are

serious enough. ....... But that which adds significance to it is that the endcannot be seen; the future is involved in uncertainty.'

In the face of such a situation nothing would have been more natural than to

expect the Government precipitating into some kind of action to save itself, if

not others, from an impending calamity. Far from taking immediate steps, the

Government not only failed to take any initiative, but showed, when pressed



possible to hold that gold had appreciated but that silver had not depreciated

may be left for logician to decide upon. But for a silver-standard country to

refuse to undertake the reform of her currency system on the plea that it was

gold that had appreciated was no doubt a tactical error. In military matters

there is probably such a thing as depending on a position; but in currency

matters there cannot be such a thing. The reason is that in the former

strength sometimes lies in the weakness of the other. But in the case of the

latter the weakness of one becomes the weakness of all. There can be no

doubt, therefore, that the Government, in discarding its responsibility to do the

needful in the matter, committed the same kind of mistake as a man who, in

the words of Prof. Nicholson, " should suppose that the ship cannot sink

because there is no leak in the particular cabin in which he happens to sleep."

That the attitude of inaction was unwise was soon brought home to the

Government of India. Within a short space of two years it was obliged to

reconsider the position taken in 1876. In a dispatch dated November 9, 1878,the Government of India observed:—

"5. It was to have been expected that a subject so encompassed with

difficulties should not receive any early settlement, and it was probably the

wisest, as it was certainly the most natural course, to allow further time to

elapse before attempting any final solution of the grave problem it involved.

The improvement that took place in the value of silver in the year 1877

favoured this policy in action; and it is only now, when a fresh fall has

brought down the rupee to a value hardly greater than that which it had in

July, 1876, that the serious nature of the risk which our existing currency

law entails on us is once more forced on our attention by its practical effects

on the Home remittances.

"21. The uncertainty that has now for some years prevailed with reference

to the value of silver, and the consequent disturbances in the exchange,

have...... been causes of continued financial difficulty to the Government......

and it is not possible to doubt that similar results must have been produced

by these disturbances in the trade transactions of the country, or that

investments of foreign capital in India, either for trading or other purposes,

must have been very seriously interferred with by their influence.

" 23. Such we hold to be a true statement of the present difficulties andprospective risks of maintaining the existing Currency Law, and we feel

assured that they have not been in any way overstated. It remains for us to

inquire whether any practical remedy could be devised that should not be

open to serious objections, or the risks attending the adoption of which

should not be so great as to prohibit it. We feel most fully the heavy

responsibility that will rest on us in dealing with the currency of India ; but it



is plain that the responsibility for doing nothing is no less great. Whether the

law is left as it is, or whether it is changed.. the result will be equally due to

our action, and we cannot, if we would, avoid facing this grave question.

" 24. To obtain fixity of exchange by the adoption of a gold standard, and

the substitution of a gold for a silver currency through the direct action of

Government, has, we think, been conclusively shown to be impracticable by

the dispatch of the Government of India of October last, and this plan

therefore calls for no further notice. The increase in the weight of the rupee,

also noticed in that dispatch, is equally undeserving of attention, as in fact, it

would give no security for the future, and would entail a heavy charge

without accomplishing the essential point to be aimed at. There remains the

simpler, and first proposed suggestion, the limitation of the coinage of silver,

which, though rejected in 1876 by the Government of India...; appears to us

to call now for a closer examination.

"25. This suggestion in its main features is, that the Coinage Act shall beso far modified as to withdraw the free right of the public to take silver

bullion to the Mint for coinage, and either to suspend it entirely in future, or

limit it for a time.

" 26. It is obviously an essential part of any such scheme, if it is to have

the effect of fixing the exchange value of the rupee, that the power of

obtaining that coin in future shall be regulated in some manner by a gold

payment, and that the relation between sterling and rupee currency shall

thus be fixed irrespective of the fluctuations in the relative value of the

metals of which the coins are formed.

" 27. It is not, on the other hand, an essential part of such a plan that any

particular relation of value should be thus fixed at two shillings...... or at any

smaller or larger proportion. All that is necessary is that the rate, being once

fixed, shall remain for the future unchanged.

****

"33. Probably the most important question is...... whether or not it is

practicable to maintain a silver coinage as the principal element in our

currency, with a very limited gold coinage, or without a legal-tender gold

coinage at all. The Government of India, in its dispatch of 1876, expressed

an opinion adverse to the possibility of maintaining such a system...... On afull reconsideration of this point, we are led to take the opposite view, and to

think that such a system would be perfectly practicable and would lead to no

material difficulty. It is true that there is no country in which such a condition

of things actually exists. But those countries, and there are many of them, in

which an inconvertible paper currency exists or has existed, give proof that

the far greater anomaly of a currency devoid of any intrinsic value whatever



is capable of performing the work of a metallic currency satisfactorily, and of

maintaining its local exchange value, so long as an excessive issue is only

guarded against.

*****

"37. (Such) instances (as the British shilling and the French five franc

piece) seem to show that neither in the way of surreptitious coinage, nor of

discredit from depreciation of intrinsic value, it is probable that there would

be any serious difficulty in keeping the rupee in circulation at its present

weight, at a nominal value of two shillings, with a gold standard and a partial

gold coinage.

****

" 46. We are thus led to the general conclusion that it will be practicable,

without present injury to the community as a whole, or risk of future

difficulties, to adopt a gold standard, while retaining the present silver

currency of India, and that we may thereby in the future fully protectourselves from the very real and serious dangers impending over us so long

as the present system is maintained. We consequently desire to

recommend to Her Majesty's Government the adoption of such a change at

the earliest moment possible, and we shall proceed to explain, in all

necessary detail, the measures by which we advise that it should be

effected.

* * *

" 50. It has to be borne in mind that it is not the object of our action to force

on India a gold currency, or to displace the silver currency, but rather to

avoid such a result, or to check the tendency in that direction, so far as it

can be done consistently with the adoption of the gold standard. We are

consequently led to the conclusion that, while we give certain facilities for

the introduction of gold coins into India, we should not yet go so far as to

declare them a general legal tender; and that we should at the same time,

make provision for the coining of silver, without limit as to quantity, but on

terms that will give no advantage to the introduction of silver in relation to

gold.

" 51. These objects we propose to attain as follows:—We first take power

to receive British or British Indian gold coin jn payment for any demands ofthe Government, at rates to be fixed from time to time by the Government,

till the exchange has settled itself sufficiently to enable us to fix the rupee

value in relation to the pound sterling, permanently at two shillings.

Simultaneously with this, the seignorage on the coining of silver would be

raised to such a rate as would virtually make the cost of a rupee, to persons

importing bullion, equal in amount to the value given to the rupee in



comparison with the gold coins above spoken of. We should thus obtain a

self-acting system under which silver would be admitted for coinage, at the

fixed gold rate, as the wants of the country required; while a certain limited

scope would be given for the introduction and use of gold coin, so far as it

was found convenient or profitable."

Such was the scheme outlined by the Government of India. The reason why

it rejected the Smith plan, although it was simple, economical, and secure,

was because it contemplated a demand by India on the world's dwindling

stock of gold. Now, in the circumstances then existing, this was a fatal defect,

and the powers-that-be had already decided that at all cost India must be kept

out of what was called the " scramble for gold." Therefore, to have proposed

an effective gold standard was to have courted defeat. A mild and diluted

edition of a gold standard such as was proposed by the Government was all

that stood any chance of success. But even this timid attempt did not fare well

at the hands of the Committee appointed jointly by the Secretary of State andthe Chancellor of the Exchequer to examine and report upon the proposals.

The members of the Committee were " unanimously of opinion that they

cannot recommend them for the sanction of Her Majesty's Government.'' The

reasons which led to the rejection of the proposals we are not permitted to

know. Although the Report of the Committee was made public, the

proceedings have never seen the light of day. Indeed, there has been a most

stern and obstinate refusal on the part of the officials to allow a peep into

them. Why they should be regarded as confidential after a lapse of nearly half

a century it is difficult to imagine. Enough, however, was revealed by Sir

Robert Giffen, who was a member of this Committee, in evidence before the

Indian Currency Committee of 1898 for us to know the contents of this closely

guarded document. It seems that the Committee declared against the

proposals because it thought they were calculated to make the Indian

currency a " managed " currency. At the time when the Committee delivered

its opinion the current prejudice was unanimously against such a system. All

acknowledged writers on currency were pronounced opponents of an

artificially regulated systemA naturally automatic currency was their ideal. In

addition to being misled by this prejudice, the Committee felt convinced that

the situation would soon ease itself by the natural working of economic forceswithout necessitating a reform of the Indian currency. This conviction on the

part of the Committee was founded on the high authority of the late Mr. Walter

Bagehot that the disturbance could not but be temporary. His argument was

that the depreciation would encourage exports from India, and discourage

imports, and the unfavourable balance of trade thus brought about would

induce a flow of silver to India, tending to raise its price. He was also of



opinion that increased demand for silver would also arise from outside India.

He argued that the reduction of demand caused by the demonetisation of

silver by some countries would be more than compensated for by the

adoption of silver by other countries then on a paper basis for their impending

resumption’s of specie payment.

Whatever might be said with regard to the Committee's preference of a

natural to an artificial system of currency, there can be no doubt that in

turning down the proposals of the Government, in the hope that silver would

recover, it was grossly deceived. The basic assumptions on which the

Committee was led to act failed to come true. To the surprise of everybody

India refused to absorb this "white dirt." Indeed, it was one of the puzzles of

the time to know why, if silver had fallen so much in Europe, it did not go to

India in larger quantities. Many blamed the Secretary of State for the sale of

his Council Bills.

These bills, it was said, presented an alternative mode of remittance so muchbetter as to prevent the sending of silver to India, and thereby caused a

diminution in the demand for it. That this was not a correct view is obvious.

Silver could not have gone to India more than it did even if Council Bills had

been abolished. Council Bills must be regarded as ordinary trade bills drawn

against services and commodities, and could not be said to have competed

with the transmission of bullion in any special manner different to that

attributable to the trade bills. The only bearing the Council Bills may be said to

have had upon the issue in question lies in the fact that to the extent they

figured in the transactions they prevented India from buying other

commodities. But there was nothing to prevent her residual buying power left

over after paying for the Council Bills from being utilised in the purchase of

silver in preference to other commodities. That this buying power would be

used in purchasing silver because it was depreciated in Europe was

theoretically an unsound assumption on the part of Mr. Bagehot. The deciding

factor which could have caused such a diversion of this residual buying power

to the purchase of silver was whether it was appreciated in India. Only on that

condition could there have been a flow of it to India. But as matters then

stood, it was the opinion of Prof. Pierson that when the general depreciation

of silver commenced all over the world, it had been forestalled in that part ofthe globe in which India lies. India was already glutted with silver. Under

ordinary circumstances India would have sent back a large portion of its silver

to Europe. But the general depreciation prevented her from doing so; and

now there were two opposing forces, one tending to produce an export of

silver from India to Europe and the other tending to produce an export of

silver from Europe to India; and, although the latter was the stronger of the



States was also involved in similar evils, although they arose from choice

rather than from necessity. Yielding to an agitation of the silver men, it passed

in 1878 a law called the Bland Allison Act, requiring the Secretary of the

Treasury to purchase and coin each month not less than $2,000,000 and not

more than $4,000,000 worth of silver bullion into standard silver dollars, which

were to be full legal tender for all debts public and private, " except where

otherwise expressly stipulated in the contract,"

As the metalic value of these dollars fell with every fall, while their legal value

remained as before, they became, like the thalers and the francs, overvalued

coins. It is clear that when the stock of a country's currency is not equally

good for all purposes it is relatively speaking in an unsatisfactory condition.

Though good for internal purposes, these coins were useless for international

payments. Besides making the whole currency system unstable and top-

heavy, they could not be made to serve the purpose of banking reserves,

which it is the prime function of a metallic currency to perform in moderntimes. The possibilities they opened for illicit coinage were immense. But what

made their existence such a source of menace was the fact that a large

proportion of the total metallic money of these countries was of this sort. The

figures given by Ottomar Haupt in Table XXIII (see p. 461) prove sufficiently

the difficulties that these countries had to face in regulating and controlling

such a mass of token currency.

If a gold-standard country like England had escaped these difficulties it was

only to meet others equally embarrassing. As has been pointed out before,

the continued fall of prices, the reflex part of the appreciation of gold, had

produced a depression in the trade and industry of the country never known

before in its history. Apart from this, the monetary disturbances affected the

yield on capital investment, the mainstay of so many of her people, by

reducing the field for its employment. Said the American Commission :—

"Within twenty years from 1877 to 1897, it could probably be correctly

stated that the power of money to earn dividends was reduced to one-half,

or in nearly that proportion. That reduction of the earning power of capital

affected injuriously everybody who depended upon investments for a living.

It affected also the profits and enterprises of the captains of industry and the

kings of finance. In England and in France the price of Governmentsecurities rose to a point which made it no longer possible for the man of

small means to invest in them and acquire an adequate support during his

declining years."

It is, of course, open to doubt whether the conclusion drawn is the right one.

But the fact remains that owing to monetary disturbances the field for the



investment of English capital had become considerably restricted. And, as a

way of getting a living, capital investment was an important resource to the

English people.

To mend such a situation there were convened one after another three

International Monetary Conferences to establish a bimetallic par between gold

and silver. The first International Monetary Conference was convened at Paris

in the year 1878 at the invitation of the United States. The second met at the

same place in 1881 at the joint call of France and the United States. The third

and the last assembled by the wish of United States in Brussels during the

year 1892.

From the gravity of the situation nothing could have been more natural than

to expect these Conferences to fructify into an agreement upon the

consummation of the project for which they were called into being. But, far

from reaching any agreement, the deliberations of these Conferences proved

to be entirely futile. Only the second Conference showed any sign ofagreement. The first and the third marked a strong deviation in the opposite

direction. The advance, if any, that was made, as a result of these

deliberations, was summed up in the pious opinion that it was necessary to

retain and enlarge the monetary use of silver. But so weak on the whole was

the response that practice failed to testify as to the sincerity of this solemn

declaration.

TABLE XXIII

DISTRIBUTION OF THE STOCK OF MONEY IN DIFFERENT COUNTRIES

Countries Monetary Circulation at the Beginning of 1892.

Gold. Silver. Uncovered Notes Fractional

Currency.

Billon Money.

Austria fl. 65,000,000 197,000,00 601,000,000 40,000,000 14,000,000

England .£ 118,000,000 — 10,000,000 26,000,000 1,900,000

France fr. 3,900,000,000 3,200,000,000 572,000,000 280,000,000 280,000,000

Germany m. 2,500,000,000 430,000,000 450,000,000 457,000,000 57,000,000

Holland fl. 64,000,000 135,000,000 98,000,000 7,600,000 1,800,000

Italy . li 485,000,000 81,000,000 847,000,000 150,000,000 75,000,000

Russia . £ 59,500,000 — 51,200,000 8,200,000 1,000,000

Spain . pes. 160,000,000 646,000,000 548,000,000 190,000,000 157,000,000

U.S.A. doll. 671,000,0010 458,000,000 419,000,000 77,000,000 18,000,000

The reasons for the failure of these Conferences to reach a bimetallic

agreement have not been properly understood. One cannot read the debates



on bimetallism at these Conferences without observing that the opposing

parties approached the subject with different objectives. To one the principal

objective was the maintenance of a stable ratio of exchange between gold

and silver irrespective of the question whether one or both remained in

circulation; to the other it was the maintenance of the two metals in

concurrent circulation. As a consequence of this difference in the lines of their

approach an agreement on a bimetallic project became well-nigh impossible.

The workability of bimetallism in the sense of maintaining a stable ratio

between gold and silver is necessarily an indefinite proposition. Nonetheless,

it cannot be said, if the debates at these Conferences are taken as a guide,

that the possibility of a successful bimetallic system in the stable-ratio sense

of the term had been denied by the majority of economic theorists, or by the

Governments who met at these Conferences. On the other hand, the

Conference of 1881, the most important of the three, was remarkable for its

confession regarding the workability of the system. All Governments, barringa few minor ones, were in favour of it. Even the British Government, in

consenting to bring into operation the silver clause of the Bank Charter Act,

must be said to have given its word of approval.

But what did bimetallism promise, as a piece of mechanism, to maintain the

two metals in concurrent circulation ? The bimetallists used to cite the

example of France in support of the stability of the double standard. But was

there a concurrent circulation of two metals in France under the bimetallic

system ? Far from it. For, although it was a virtue of the system that changes

in the production of the two metals made no appreciable variations in the

fixed ratio of exchange, yet the slightest of such as did occur were sufficient

to effect the greatest revolution in the relative circulation of the two metals, as

the following table clearly brings out:—

TABLE XXIV

MINTAGE OF GOLD AND SILVER IN FRANCE

Period Gold

Million

Francs

Silver

Million

Francs

Ratio of

Value

1803 to 1820 868 1,091 1: 15.58

1821 to 1847 301 2,778 1: 15.80

1848 to 1852 448 543 1: 15.67

1853 to 1856 1,795 102 1: 15.35

1857 to 1866 3,516 55 1; 15.33

1867 to 1873 876 587 1: 15.62



In mitigation of this, the bimetallists had nothing to offer. There were, no

doubt, such schemes as the one proposed by Prof. Marshall, consisting of

paper based on a linked bar of gold and silver in certain fixed proportions,

having the object of converting this " either-metallism " into double-metallism.

But such schemes apart, the free-mintage-cum-fixed-ratio plan of bimetallism

gave no guarantee against alternation in the circulation. Indeed, under that

plan the alternation is the very soul of the mechanism which keeps the ratio

from being disturbed. The only thing the bimetallists could say in mitigation of

this was thatthe alternation in currency would confine itself to bank reserves

and would not be extended to the pockets of the people. This was only an

eyewash, for how could the banks arrange their reserves except in conformity

with the prejudices of the people ? Even international agreement to use gold

and silver at a fixed ratio was no guarantee that this concurrent circulation

would be maintained. Stability of ratio did depend to a large extent upon aninternational agreement, for, although it could be maintained by the action of

one nation, the deviations of the ratio in that case would probably be greater.

But mere international agreement has no virtue of itself to prevent one metal

driving out the other. To suppose that Gresham's Law is powerless under

international agreement is a gross mistake. Gresham's Law is governed by

the relative production of the two metals to the total currency needs of the

movement. Supposing the production of one metal relatively to the other was

so enormous as to more than suffice for the currency needs, how could

international agreement prevent the former from driving the latter entirely out

of circulation ? On the other hand, international agreement, far from

discouraging, would encourage the process.

In adopting bimetallism, therefore, the nations had to make a choice

between a stable ratio and a concurrent circulation, for there might arise a

situation in which there was a stable ratio but no concurrent circulation of both

the metals. If the Conferences broke down, it was not because they did not

recognise the possibility, which was unanimously upheld by such an impartial

tribunal as the Gold and Silver Commission of 1886, of a stable ratio being

maintained under a bimetallic regime. They broke down because the

bimetallic system did not guarantee the concurrent circulation of the twometals. However, it is certain the impossibility of concurrent circulation could

not have been such a drawback if the immediate effect of bimetallism would

have been a flow of gold into circulation. But as matters then stood the

immediate effect would have been to bring silver into circulation. It was this

more than anything else which scared away most of the nations from the

adoption of the bimetallic system. Now, it is a curious thing that nations which



had assembled together to bring about a stable ratio between gold and silver

should have rejected a system which gave a promise of such a stability on the

comparatively less significant ground that it had the effect of altering the

composition of the circulation from gold to silver. But the fact must be

recognised that at the time the question of reconstituting the bimetallic system

was agitating the public mind, in most of the European countries gold and

silver had ceased to be regarded as equally good for currency purposes. The

superiority of gold to silver as a carrier of large value in small bulk was

coming more and more to be appreciated in the latter part of the nineteenth

century, and no plan of stabilisation which did not provide for the unhindered

circulation of gold was likely to meet with common approval. This prejudice

was in no way confined to a gold-standard country like England. The closing

of the Mints by the Latin Union is a proof positive of the change in the attitude

of the bimetallic countries. As Jevons argued

:— "So long ...... as its operation resulted in substituting a beautiful coinage of

napoleons, half-napoleons, and five-franc pieces in gold for the old heavy

silver ecus, there was no complaint, and the French people admired the

action of their compensatory system. But when [after 1873] it became evident

that the heavy silver currency was coming back again...... the matter assumed

a different form."

So great was the prejudice in favour of gold that the interests of the chief

Powers in the various Conferences, it may be truly said, waxed and waned

with the changes in the volume of their gold reserves.

In 1878, the United States took the lead in calling the Conference because

the working of the Bland Allison Act checked the inflow of gold necessary for

its cash payments. Germany was indifferent because she had enough gold

and was confident of selling off her demonetised silver without loss. In 1881

France and Germany showed more anxiety for reform because the former

had lost all her gold and the latter was unable to palm off her silver. By 1892

none was so poorly supplied with gold as was the United States, largely as a

result of a reckless policy which did her harm without doing good to anyone

else, and she was therefore left alone to support the cause of silver.

Possessed as almost every Government was by this prejudice for gold, itwas not an ineradicable prejudice. What the countries wanted was a lead

from an influential nation. Throughout the debates at these Conferences one

thing stood out very clearly. If England could have brought herself to adopt a

bimetallic system, others, like sheep, would have followed suit. But she was

too much wedded to her system to make a change, with the result that

bimetallism, as a way out of the currency difficulties, became a dead project.



The vanishing of the prospect of re-establishing the bimetallic system as a

result of her obstinacy was a small matter to the European countries. They

had virtually made gold, the international form of money, as the basis of their

currency, and were therefore quite indifferent as to the issue ; but it was a

terrible blow to the hopes of India. After the proposal of 1878 had been turned

down, bimetallism was considered by the Government of India as the remedy,

and its advent looked forward to for salvation. It is true that in the beginning of

bimetallic discussions the attitude of the Indian Government was rather

lukewarm. In a dispatch dated June 10, 1881,

to the Secretary of State, it was revealed that the Government of the time was

divided in its opinion regarding the merits of bimetallism. The Viceroy and

another member of Council refused their support on the ground that

bimetallism was unsound in principle,* and even the majority who thought

differently on this aspect of the question were not then prepared to go to the

length of joining a bimetallic union, although they did not see any objection todoing so " if a sufficiently large number of other Governments were prepared

to join " in it. With the growth of their financial difficulties, however, this

slender faith in bimetallism considerably deepened, so much so that in 1886

the Government addressed to the Secretary of State a dispatch urging him to

take the initiative in calling an International Monetary Conference to establish

a stable ratio between gold and silver. So intense was its interest in the

consummation of bimetallism that it did not hesitate to administer a sharp

rebuke to the Treasury when they negatived its suggestion referred to them

for consideration by the Secretary of State. With such feelings of faith and

hope the Government of India entered these international Conferences and

watched their fortunes. But no Government could have been treated with

such suspicion and injustice as was the Government of India. Its admission to

the bimetallic union was desired by none of the Powers, not even by England.

It was treated as a villain whose advances were nothing but maneuvers to

pounce upon the already dwindling stock of gold. Not only was it planned to

keep India out of the bimetallic union, but she was to be required to pledge

herself not to take a mean advantage of the union after its efforts had

succeeded in establishing a stable ratio by making gold legal tender. All these

guarantees the Government of India had offered in a pathetic faithfulness tothe cause of bimetallism, on the success of which it had depended so much.

Consequently, when the attempt failed, the disappointment caused to the

Government of India almost broke its heart. It is not too severe to say that the

part played by the British authorities in causing this disappointment was

highly irresponsible—one might almost say wicked. They forced India against

her declared wishes to keep to the silver standard, partly to trail her off from



making any demand for gold, and partly to silence the criticisms of other

nations that Britain was not taking her share in the matter of rehabilitating

silver. This was not the only advantage exacted from a country bound to

obey. On the one hand it restrained the Government of India from taking any

independent line of action in the matter of currency reform, and on the other

such means as were calculated to make good the losses which arose from a

depreciating currency were subjected to Parliamentary censure. The House

of Commons was twice moved, once in 1877 and again in 1879, to resolve

that the Government of India should lower its tariff, ostensibly in the interest of

free trade, but really in the interests of relief to the depressed condition of

Lancashire. The consequence was that the Government could not tap one

important source of its revenue in times of its greatest adversity. The only

adequate recompense, the British authorities could have made to a

Government so completely paralysed by their dictations, and of whose

interests they so loudly claimed to be the lawful trustees, was to haveconsented to join the bimetallic union, the consummation of which only waited

upon their grace. But, as is well known, they did nothing of the kind, so that,

after a period of enforced waiting and by no means unavoidable suffering, the

Government of India, at the end of 1893, found itself just where it was at the

beginning of 1878.

Like all common-sense people who pray and yet do not fail to keep their

powder dry, this interval was utilised by the silver-ridden countries, with the

exception of the United States, in strengthening their gold basis no less than

in attending the deliberation of the Monetary Conferences on the amusing

plans for extending the use of silver.

Mr. Goschen, at the Conference of 1878, had quite philosophically remarked

that States feared to employ silver because of its depreciation and the

depreciation continued because the States feared to employ it. Now, if the

first part of the diagnosis was correct, we should have found the States

seriously engaged in the task of rehabilitating silver when its price was

propped up by the silver legislation of the United States. On the other hand,

just so far as the monthly purchases of silver, under the Bland Allison Act of

1878, or the Sherman Act of 1890, held up the price of silver, not only did

they not feel anxious to take steps to restore it to its former position, but theyactually took advantage of the rise to discard it. And it is not possible to blame

them either, for with the prospect of a bimetallic union vanishing into thin air

the accumulation of this dead weight would have only ended in a gratuitous

embarrassment. India alone refused to profit by the squeeze, which the

United States took vicariously for other nations, and allowed precious time to



to provide that on the one hand the Secretary of State should fix a minimum

rate for his drafts, and that the Government of India on the other should levy a

duty on all imports of silver equal to the difference between the daily official

quotations of bar silver in London and the price of silver corresponding to the

rate fixed for the Council drafts. The sixth was to introduce a bimetallic coin,

to be called the imperial florin or rupee, made of the value of 2s. and

containing 4 per cent. weight in gold and the balance in silver. The seventh

was to establish independent gold and silver standards without any fixed ratio

of exchange between them, or with some slight inducement for the use of

gold in transactions of larger denominations. Although the Government of

India was not in agreement with these clever if not crazy plans of currency

reforms, it agreed in the aim they had in view, namely, to place India on a

gold basis without involving the actual use of gold in place of the existing

rupees in circulation. With this aim in view it revived for adoption the more

simple and more scientific plan of Colonel Smith. As a preliminary, theGovernment reverted to the policy of the resolution of the Bengal Chamber of

Commerce, to the adoption of which it saw such "fatal objections " in 1876. In

the dispatch dated June 21, 1892, which contained the proposals, the

Government of India asked for nothing more. In the words of their author they

proposed

"......That the Indian Mints should be closed to the unlimited coinage of

silver, and no further steps taken until the effect of closing the Mints had

been ascertained.

"The ratio at which the change from silver to the gold standard should be

made was subsequently to be settled and it was said that a ratio based on

the average price of silver during a limited period before the Mints had been

closed would probably be the safest and most equitable. When this ratio

had been settled, the Mints were to be opened to the coinage of gold at that

ratio, and gold coins were to be made legal tender to any amount."

These proposals were submitted for examination to a Departmental

Committee, commonly known as the Herschell Committee. They were said to

be defective in one important particular, and that was the absence of due

recognition of the necessity of a gold reserve for the maintenance of the value

of the rupee. Many people felt doubtful of the success of the proposals unlessbacked by an adequate gold reserve. But the Herschell Committee, after an

extended investigation into the working of the currency systems of different

countries, reported:—

"It is impossible......... to review foreign systems of currency, without feeling

that, however admirable may be the precautions of our own [English]



gold, should it accumulate in them to an inconvenient extent, there followed

another Notification, No. 2564, requiring that the Currency Department should

issue, on the requisition of the Controller-General, currency notes in

exchange for gold coin or gold bullion, at the rate of one Government rupee

for 7.53344 grs, troy of fine gold, or sovereigns or half-sovereigns at the rate

or 15 rupees and 7 rupees 8 annas respectively.

To give effect to the second modification introduced by the Herschell

Committee, there was issued a third Notification, No. 2662, to the effect that

"The Governor-General in Council hereby announces that, until further

orders, gold coins and gold bullion will be received by the Mint Masters of

the Calcutta and Bombay Mints respectively, in exchange for Government

rupees, at the rate of 7.53344 grs. troy of fine gold for one rupee on the

following conditions

(1) Such coins or bullion must be fit for coinage.

(2) The quantity tendered at one time must not be less than 50 tolas.(3) A charge of one-fourth per mille will be made on all gold coin or

bullion which is melted or cut so as to render the same fit for receipt

into the Mint.

(4) The Mint Master, on receipt of gold coin or bullion into the Mint,

shall grant to the proprietor a receipt which shall entitle him to a

certificate from the Mint and Assay Masters for the amount of the

rupees to be given in exchange for such coin or bullion payable at

the General (Reserve) Treasury, Calcutta or Bombay. Such

certificates shall be payable at the General Treasury after such

lapse of time from the issue thereof as the Comptroller-General

may fix, from time to time."

Before the policy adumbrated by these measures was carried to completion

there came up a move for the undoing of it. After (he failure of the

International Monetary Conference of 1892 the United States and France, two

countries most heavily burdened with an overvalued stock of silver, opened

negotiation with the British Government, asking the latter to agree to certain

conditions on the grant of which they were to open their Mints to the free

coinage of silver at the ratio of 15 1/2 to 1. These conditions included :

(1) Opening of the Indian Mints, which had been closed to the free

coinage of silver, and an undertaking not to make gold legal tender in

India.

(2) Placing one-fifth of the bullion in the Issue Department of the Bank of

England in silver.

(3) (a) Raising the legal-tender limit of silver in England to £10.



(b) Issuing the 20s. notes based on silver, which shall be legal

tender.

(c) Retirement, gradual or otherwise, of the 10s. gold pieces, and

substitution of paper based on silver.

(4) Agreement to coin annually a certain quantity of silver.

(5) Opening of English Mints to the coinage of rupees and for coinage of

British dollars, which shall be full legal tender in Straits Settlements

and other silver-standard Colonies, and tender in the United Kingdom

to the limit of silver legal tender.

(6) Colonial action, and coinage of silver in Egypt.

(7) Something having the general scope of the Huskisson plan.

In these negotiations the Treasury again reverted to its old pose. It refused

to discuss the conditions requiring a change in the British currency, but

argued that the opening of the Indian Mints, if brought about, should be

regarded as an adequate " contribution which could be made by the BritishEmpire towards any international agreement with the object of securing " a

stable monetary par of exchange between gold and silver

and the representatives of the United States and France seemed to have

concurred in that view. The negotiations, however, failed, because of the firm

stand taken by the Government of India. The Government had suffered too

long to be the scapegoat of the Treasury. Nor did it see any reason why it

should be called upon to pull the chestnuts off the fire for the benefit of

France and the United States, in a letter commenting upon the proposals, the

Government of India observed:—

"The changes which are involved in the arrangements proposed to Her

Mahesty's Government are the following: France and the United States are

to open their Mints to the free coinage of silver, continuing the free coinage

of gold and the unlimited legal tender of coins of both metals, the ratio

remaining unchanged in France and being altered in the French ratio of 15

1/2 to 1 in the United States. India is to open her Mints to silver to keep

them closed to gold, and to undertake not to make gold legal tender. France

and the United States would thus be bimetallic; India would be monometallic

(silver) ,whilst most of the other important countries of the world would be

monometalllic (gold).* ****

" The first result of the suggested measures, if they even temporarily

succeed in their object, would be an immense disturbance of Indian trade

and industry, by the sudden rise from about 16d. to about 23d. the rupee.

Such a rise is enough to kill our export trade, for the time at least...... such

an arrangement as is proposed is an infinitely more serious question for



India than for either of the other two countries, for it seems clear that

practically the whole risk of disaster from failure would fall on India alone.

What would' happen in each of the three countries if the agreement broke

down and came to an end ? France possesses a large stock of gold, and

the United States are at present in much the same situation as France,

though the stock of that metal is not so large. It may be admitted that if no

precautions were taken these gold reserves might disappear under the

operation of the agreement, and in that case, if the experiment ultimately

failed, the two countries concerned would suffer great loss. But it is

inconceivable that precautions would not be taken, at all events, so soon as

the danger of the depletion of the gold reserves manifested itself, and,

therefore, it is probable that no particular change would take place in the

monetary system of France or the United States, the only effect of the

agreement being a coinage of silver which would terminate with the

termination of the agreement. Thus the whole cost of the failure, if theexperiment should fail, would be borne by India. Here the rupee would rise

with great swiftness, it would keep steady for a time, and then, when the

collapse came, it would fall headlong. What course could we then adopt to

prevent the fluctuation of the exchange value of our standard of value with

the fluctuations in the price of silver ? We do not think that any remedy

would be open to us, for if the Indian Mints were reopened to silver now, it

would...... be practically impossible for the Government of India to close

them again, and even if they were closed it would only be after very large

additions had been made to the amount of silver in circulation."

But soon after it had refused to be diverted from the goal it had placed

before itself, namely the introduction of a gold standard, it was faced with a

crucial problem in its existing monetary arrangements. The rupee stock, the

addition to which was stopped since 1893 by the closure of the Mints, was

large enough to meet the needs of the people for some considerable time.

In the first few years after the closure, the rupee currency was not only

abundant but was also redundant. Soon it ceased to be redundant, and

indeed by the end of 1898 it became scarce, so much so that the discount

rate in the Indian money market rose to 16 per cent., and continued at that

pitch during the larger part of the year. Such was the outcry against whatwas called the policy of " starving " the currency, that the Government was

obliged to pass an Act (No. II) of 1898 to permit currency notes issued in

India against gold tendered in London to the Secretary of State. The Act

was doubly easeful to the then starved condition of the Indian money

market. By the measures adopted in 1893 gold was not genera! legal

tender, so it could not be used when the rupee currency fell short of the



needs of the time. The new Act, it is true, did not make gold general tender,

but permitted it to be used on behalf of the general public

as a backing for the issue of currency notes which were general legal tender. The

Act, however, could have required that gold be laid down in India before notes

could be issued. But as the remittance of gold to India took some three or four

weeks, it was feared that the remedy might " prove too tardy to be effective "

unless the interval was done away with by providing that gold with the Secretary

of State in London was lawfully tantamount to gold with the Paper Currency

Department in India for the purposes of note issue.

In doing this the Act only testified to the urgency of the situation. A sound

currency system must be capable of expansion as well as contraction. The

Government, by the closure of the Mints in 1893, had contracted the currency

to the point of danger. In 1898 it was called upon to undertake measures to

provide for its expansion. Now, there were two methods open to bring aboutthis desired result. One was to keep the Mints closed and to permit additions

to currency through the use of the gold by making the sovereign general legal

tender. This was the plan proposed by the Government of India. In their

dispatch dated March 8, 1898

they argued :—

" Our present Intention is rather to trust to the automatic operations of

trade. The amount of coin required for the needs of commerce increases

every year: and as we print no increase in the amount of silver coin, we may

reasonably expect that the effect of the increasing demand for coin will raise

exchange to a point at which gold will flow into the country, and remain in

circulation. The position will thus become stronger and stronger as time

goes on, but at the beginning at least, gold will not be in circulation in the

country to more than the extent necessary to secure stability of exchange.

The mass of the circulation will be a silver circulation, maintained at an

appreciated value (just as it is at present), and we can be content to see

gold coin remain little more than a margin, retained in circulation by the fact

that its remittance out of the country could create a scarcity of coin which

would have the effect of raising the exchange value of the silver rupee in

such manner as to bring it back, or, at the very best, stop the outwardcurrent of remittance. We shall have attained a gold standard under

conditions not dissimilar from those prevailing in France, though not a gold

circulation in the English sense; and this last may possibly not be necessary

at all."

Besides expanding the currency through the use of gold, there was also

another mode of effecting the same object. It was urged that this increase of



currency might as well take place by Government coining rupees whenever

there arose a need for additional currency. Though the Mints were closed, the

Government, by Notification No. 2662, had undertaken to give rupees to

anyone desiring to have them at the rate of 7.53344 grs. troy of fine gold per

rupee.

The Government had only to give effect to that notification to augment the

currency to any extent desired. Prominent in the advocacy of this plan of

expanding the currency were Mr. Probyn and Mr. A. M. Lindsay. Both claimed

that the plan of the Government of India was defective because, although it

provided for the expansion of currency by making gold legal tender, it made

the rupee entirely inconvertible, and thereby likely to defeat the policy of

stabilising its exchange value. On the other hand, they deemed their plans to

be superior to that of the Government of India because they recognised the

obligation to provide for the conversion of the rupee currency on certain

terms. Although the plans of both of them had contemplated some kind ofconvertibility, yet they materially differed in the particular mode in which

conversion was to be effected. Mr. Probyn proposed

1. That legislative effect should be given to the notification of 1893, under

which the public can obtain rupees at the Indian Mints and Reserve

Treasuries in exchange for gold, at the rate of 1s. 4d.

2. That the gold so received should be part of the paper currency reserve,

ana should be held either in the form of full legal-tender gold coins of the

United Kingdom, or gold bars representing not less than Rs. 1,000 each.

3. That in order to give the rupee currency automatic power of contraction.

Government should be empowered (though not required) so soon as the

portion of the paper currency reserve has continuously for one year been

less than that held in gold, to give gold in exchange for rupees or rupee

notes at the rate of 1s. 4d., if presented for the purpose in quantities of Rs.

10,000.

4. That the existing Rs. 10,000 notes should be called in. and, in future,

notes of Rs. 10,000, payable at the option of the holder either, in gold or in

silver rupees, should be issued in exchange for gold alone, gold in the form

of bars being specially reserved to meet any such notes outstanding.

Mr. Lindsay, on the other hand, followed on lines quite different from thoseadopted by Mr. Probyn. He proposed

that the Government should offer to sell, without iimit on the one hand, rupee

drafts on India at the exchange of 16 1/16d. the rupee, and on the other hand,

sterling drafts on London at the rate of exchange of 15 3/4d. the rupee. The

funds necessary for the transactions were to be kept separate from the



ordinary Government balances in " Gold Standard " Offices in London and in

India. The London Office was to be kept in funds to meet drafts drawn on it —

(1) by borrowing in gold to the extent of five or ten million sterling;

(2) by the receipts realised by the sale of drafts on India:

(3) by the receipts realised by the sale of silver bullion in rupee melted

down;

and

(4) when necessary, by further gold borrowing.

The Indian Gold Standard Office was to be kept in funds to meet the drafts

drawn on them—

(1 ) by the receipts realised by the sale of drafts on London ; and

(2) by the coinage when necessary of new rupees from bullion, purchased

by the London Gold Standard Office and sent to India.

The principal point of difference between the scheme of currency advocated

by the Government of India on the one hand and that put forth by Messrs.Probyn and Lindsay consisted in the fact that the former proposed to

establish a gold standard with a gold currency, while the latter proposed to

establish a gold standard without a gold currency.

To adjudicate upon the relative merits of a gold standard with a gold currency

and a gold standard without a gold currency, the Secretary of State appointed

another departmental Committee, under the chairmanship of Sir Henry

Fowler. After taking a mass of important evidence, the Committee observed

:—

" 50. On this scheme [of Mr. Probyn] we remark that, while bullion may be

regarded as the international medium of exchange, there is no precedent for

its permanent adoption for purposes of internal currency; nor does it accord

with either European or Indian usage that the standard metal should not

pass from hand to hand in the convenient form of current coin. No real

support for such a scheme is to be drawn from the purely temporary

provisions of " Peel's Act " of 1819, whereby, for a limited period, the Bank

of England, as a first step to the resumption of cash payments, was

authorised to cash, in stamped gold bars, its notes, when presented in

parcels of over £ 200. Little or no demand for gold bullion appears to have

been made on the Bank itself in 1821.****

" 53. It is evident that the arguments which tell against the permanent

adoption of Mr. Probyn's bullion scheme, and in favour of a gold currency

for India, tell more strongly against Mr. Lindsay's ingenious scheme for what

has been termed ' an exchange standard.' We have been impressed by the

evidence of Lord Rothschild, Sir John Lubbock, Sir Samuel Montagu and



others, that any system without a visible gold currency would be looked

upon with distrust. In face of this expression of opinion, it is difficult to avoid

the conclusion that the adoption of Lindsay's scheme would check that flow

of capital to India upon which her economic future so greatly depends. We

are not prepared to recommend Mr. Lindsay's scheme, or the analogous

schemes proposed by the late Mr. Raphael and by Major Darwin, for

adoption as a permanent arrangement; and existing circumstances do not

suggest the necessity for adopting any of these schemes as a provisional

measure for fixing the sterling exchange."

The Committee preferred the scheme of the Government of India, and

outlined a course of action to be adopted for placing it on a permanent

footing, which may be stated in the Committee's own language as follows:—

"54. We are in favour of making the British sovereign a legal tender and a

current coin in India. We also consider that, at the same time, the Indian

Mints should be thrown open to the unrestricted coinage of gold on termsand conditions such as govern the three Australian branches of the Royal

Mint. The result would be that, under identical conditions, the sovereign

would be coined and would circulate both at home and in India. Looking

forward, as we do, to the effective establishment in India of a gold standard

and currency, based on the principles of the free inflow and outflow of gold,

we recommend these measures for adoption." These recommendations

were accepted by the Secretary of State,

who decided that—

"the policy of keeping the Indian Mints closed to the unrestricted coinage

of silver shall be maintained, " and called upon the Government of India as

soon as it deemed expedient to

" take the necessary steps for making the British sovereign a legal tender

and a current coin. and make preparations for the coinage of gold under the

conditions suggested by the Committee."

The first recommendation of the Committee was given effect to by the

Government passing an Act commonly called the Indian Coinage and Paper

Currency Act (XXII) of 1399. That Act made the sovereign and half-sovereign

legal tender throughout India at the rate of Rs. 15 and Rs. 7 1/2 respectively,

and authorised the issue of currency notes in exchange for them. Along with placing the Indian currency on a gold basis, the Government was

anxious to open a Mint for the free coinage of gold. But as the coin to be

Issued from the Mint was the English "sovereign " the Government of India

was entirely in the hands of the British Treasury,. According to the provisions

of the English Coinage Act of 1870, it was necessary to issue a Royal

Proclamation in order to constitute an Indian Mint a branch of the Royal Mint,



a matter entirely dependent on the consent of the Treasury. It was the

intention of the Government of India to announce the Proclamation

simultaneously with the passing of the Act making the sovereign legal tender.

Indeed it held back the legislation pending the arrival of the proclamation,

and proceeded with it reluctantly when it was advised that there was likely to

be " some further delay over the Proclamation owing to legal and technical

questions." The objections raised by the Treasury, though merely technical, at

first seemed to be quite insuperable, and had it not been for the conciliatory

attitude of the India Office the negotiations would have broken down. But the

Treasury was not willing to give the project a chance. Just when a

compromise was arrived at on the technical side of the question, the Treasury

turned round and raised the question whether a Mint for gold coinage was at

all necessary in India. The Treasury argued :—

"While expressing their satisfaction that an agreement has now been

reached, my Lords think it desirable, before practical steps are taken tocarry out the scheme, to invite Lord George Hamilton to review the

arguments originally advanced in favour of the coinage of the sovereign in

India, and to consider whether the course of events, in the two years which

have elapsed since the proposal was made, has not tended to diminish their

force, and to render such advantages as are likely to accrue from the

establishment of a branch Mint wholly incommensurate with the expense to

be incurred... The gold standard is now firmly established, and the public

requires no proof of the intention of the Indian Government not to go back

on their policy, which is beyond controversy. Sovereigns are readily

attracted to India when required under existing conditions... On the other

hand the estimates of the Government of India of gold available for coinage

in that country are less than was anticipated, nor is any considerable

increase expected, at any rate for some time......

The staff would have to be maintained in idleness for a large part of the

year, at a considerable cost to the Indian Exchequer... It is, of course, for

Lord George Hamilton to decide whether, in spite of these objections, the

scheme is to be proceeded with."

The India Office replied :—

" The establishment of a Mint for the coinage of gold in India is theclearest outward sign that can be given of the consummation of the new

currency system; and to abandon the proposal now must attract attention

and provoke criticism and unrest......... His Lordship is not inclined to

abandon the scheme at the stage which it has now reached." The Treasury

sent a trenchant rejoinder, in which it remarked:—

' Indian currency needs are provided from other sources, and there is no



real demand for the local coinage of sovereigns...... My Lords cannot

believe that the position of the Gold Standard in India will be strengthened,

or public confidence in the intention of the Government confirmed, by

providing machines for obtaining gold coin...... The large measure of

confidence already established is sufficiently indicated by the course of

exchange since the Committee's Report and still more by the readiness with

which gold has been shipped to India......"

That the Treasury acted " in a spirit of scarcely veiled hostility to the whole

proposal " is unmistakable. But it cannot be denied that the Treasury used

arguments that were perfectly sound. It was inconsequential to the working of

the gold standard whence the coined sovereigns came. So long as a Mint

was open to the free coinage of sovereigns the Indian gold standard would

have been complete irrespective of the location of the Mint. Indeed, to have

obtained coined sovereigns from London would have not only sufficed, but

would have been economical.The anxiety displayed by the government was not, however, on account of

the want of a gold Mint. Indeed, so slight was its faith in the necessity of it that

in view of the opposition of the Treasury it gracefully consented to drop the

proposal. What troubled it most was the peculiar position of the rupee in the

new system of currency. Throughout the dispatch of the Government of India

there ran a strain of regret that it could not see its way to demonetise the

rupee and to assimilate the Indian currency to that prevailing in England. A

general perusal of the dispatch leaves the impression that though it

recommended the assimilation of the Indian currency to that of France and

the United States, it did so not because it thought that their systems furnished

the best model, but because it believed that a better one was not within

reach. Having regard to the accepted view of the French and the United

States currency systems, it was natural that the Government of India did not

feel very jubilant about its own. According to that view of the currency

systems of these two countries, the position of the five-franc piece and the

silver dollar has always been presented as being very anomalous. Even so

great an authority as Prof. Pierson was unable to assign them a place

intelligible in the orthodox scheme of classifying different forms of money.

In a well-ordered system of gold standard of the orthodox type, gold is theonly metal freely coined and the only one metal having full legal-tender power

; silver, though coined, is coined only on Government account in limited

amounts, and being of less intrinsic value than its nominal value, is a limited

legal fender. The former type of coins are called standard coins and the latter

subsidiary coins, and the two together make up the ideal of a monometallic

gold standard such as has been established in England since 1816. In a



scheme of things like this, writers have found it difficult to fit in the dollar or

the five-franc piece. Their peculiarity consists in the fact that although their

intrinsic value is less than their nominal value they have been inconvertible

and are also unlimited legal tender. It is owing to this anomaly that the title of

gold standard has been refused to the American and French currency

systems. Few can have confidence in what is called the limping standard, in

which it is said that somehow " the silver coin, though intrinsically of less

value than the gold, hobbles along, maintained at equality by being coupled

with its stronger associate."

But was the French system of currency so very different from the English as

to create doubt as to its stability ? Whatever may have been the differences

between the two systems a closer analysis shows that they are fundamentally

identical. If we read together the French bimetallic law of 1803 and the Mint

Suspension Decree of 1878 on the one hand, and on the other the provisions

of the English Gold Standard Act of 1816, together with the Bank Charter Actof 1844, and compare, do we find any substantial difference between the

French and English systems of currency? Prior to 1878 there was an

unlimited issue in France of both gold and silver coins of unlimited legal

tender. Prior to 1844 there was an unlimited issue in England of both gold

sovereigns and Bank of England notes, both of unlimited legal tender. In 1844

England put a limit on the issue of bank notes, but did not deprive the issues

of their legal-tender power.

In 1878 France did precisely the same thing as England did with her notes in

1844. By the decree of mint suspension, France virtually, though indirectly,

put a limit on the silver five-franc coins without depriving them of their legal-

tender power. If we regard the French five-franc coins as notes printed on

silver, it is difficult to see what constitutes the difference between the two

systems which leads economists to call one a gold standard and the other a

limping standard. If the silver franc limps or hobbles along, so does the bank

note, and the former can hobble better than the latter because of the two it

has a comparatively greater intrinsic value. If, however, it is argued that the

bank note is convertible into gold, while the five-franc piece is not, the reply is

that the comparison must be made with the fiduciary notes of the bank of

England. Those notes are practically inconvertible. For, at any given time,with the gold the Bank of England has in its Issue Department the fiduciary

portion of the notes remains uncovered, and may, therefore, be regarded as

inconvertible as the delimited issue of the five francs. But even if it is insisted

that the fiduciary notes cannot be regarded as inconvertible as the five franc

pieces, it must be pointed out that the similarity of the two is not to be

determined by considerations of convertibility or inconvertibility. The attribute



of convertibility with which the fiduciary notes of the Bank of England are

endowed is a superfluous attribute which in no way improves their position as

compared with the five-franc pieces. What makes them identical is the fact

that they are both subjected to a fixed limit of issue. Thus viewed, the French

limping standard and the English gold standard are nothing but two different

illustrations of the " currency principle " in so far as a fixed limit of issue on a

fiduciary currency is a cardinal feature of that principle.

Not only is the French monetary system identical with the English in its

organisation, but the design in both cases was identical. In the controversy

which raged over the Bank Charter Act of 1844, the motives of Lord

Overstone were not quite clearly grasped by his opponents of the banking

school of thought. Lord Overstone was not very much interested in providing

a method for preventing the depreciation of the note issue, as his opponents

thought him to be. His supreme concern was to prevent gold disappearing

from circulation. Starting from a chain of reasoning the solidity of which canhardly be said to be open to question, he came to the conclusion that gold

would be driven out of circulation by an increase in the issue of notes. To

keep gold in circulation the only remedy was to put a limit on the issue of

notes, and this was the purpose of the Bank Charter Act of 1844. Now,

precisely the same was the object of France in suspending the coinage of

silver. As has already been pointed out, owing to the fall in the value of silver

after 1873, gold was being rapidly driven out of circulation by the substitution

of this depreciated metal. To prevent this result from assuming a vast

proportion, the French adopted the same remedy as that of Lord Overstone,

and through their suspension of silver coinage protected their gold from going

out of circulation, which would have certainly been the case if no limit had

been put on silver issues.

It would not, therefore, be amiss to argue that the plan contemplated by the

Government of India, and approved of by the Fowler Committee in being

similar to the French system, was based on the same principles as governed

the English currency system, which, according to Jevons, were a " monument

of sound financial legislation."

Contents CHAPTER V

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